David Riley, group managing director of sovereign and supranational ratings at Fitch Ratings, discussed his outlook for Europe and the United States in an interview with BNN’s Business Day from the 65th CFA Institute Annual Conference in Chicago on 8 May 2012.
16 May 2012
Michael Pettis on China: “The Growth Rate in Investment Is Going to Collapse”
“What the world desperately needs is demand,” asserted Michael Pettis, professor of finance at the Guanghua School of Management at Peking University, in the closing session at last week’s 65th CFA Institute Annual Conference in Chicago.
With the United States likely to increase its savings rate and the euro in turmoil, who will be buying goods in the global marketplace? China has net negative demand, he noted, and will not be the solution to the world’s demand problem. China’s growth has been fueled by government investment, and even in the best-case scenario, he said, “the growth rate in investment is going to collapse.”
The Allure of Farmland Investments: Consistent Performance, Low Correlation
Although few have ever considered farmland to be an alluring investment, in recent years it has been getting more attention from investors, primarily due to strengthening fundamentals and a consistent performance record. Most people realize that the world population is growing and, as a consequence, the demand for food is increasing.
Net income per capita is also growing quickly, especially in counties like China that used to have surpluses but have become net importers of food as of late. The change in diet around the world toward more expensive foods, an increase in the consumption of meat, and the consistent use of biofuels are also increasing the demand for grain and other agricultural commodities. All of this bodes well for the value and returns from direct investments in farmland and farmland-based funds, in which performance is tied to these ameliorating basics.
15 May 2012
Ariel’s Mellody Hobson: Why Patience and Diversity Lead to Better Investing
“In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.”
— Benjamin Graham
This quote from the father of value investing came to mind as I listened to CNBC’s Mary Thompson interview Mellody Hobson at the 65th CFA Institute Annual Conference in Chicago last week. In an hour-long discussion, Hobson, president of Ariel Investments, explained how her firm’s investment philosophy, corporate culture, and concern for society enabled the firm not only to survive the economic turbulence of the past few years but also to flourish.
tagged: leadership
14 May 2012
Unapologetic after All These Years: Eugene Fama Defends Investor Rationality and Market Efficiency
Addressing the 65th CFA Institute Annual Conference in Chicago last week, Professor Eugene F. Fama of the University of Chicago Booth School of Business recounted a lifetime of distinguished scholarship and achievement. The unofficial “father of modern finance” took on recent criticisms of the efficient markets hypothesis (EMH) and issued stinging rebukes of “too big to fail” banks, underfunded pension plans, active investment management, and behavioral investors.
With regard to the financial crisis, Fama said, “I take a particularly contrary view on it. I don’t think it was a financial disaster that caused an economic disaster. I think you can’t reject the hypothesis that it was an economic disaster that caused the financial disaster.”
Fama also challenged the notion that the expansion of sub-prime lending itself was primarily to blame. “I think lots of crazy things were done” during the run-up to the crisis, he said. “There was probably political pressure on people financing and granting mortgages and things like that. It’s hard to think that if there wasn’t a pretty significant recession that the financial system would come crashing down.”
11 May 2012
Daniel Kahneman: Psychology for Behavioral Finance
Nobel Prize winner Daniel Kahneman is one of the founding fathers of behavioral finance. Although he holds a doctorate in psychology, not economics, he has had a profound effect on the dismal science. These days economic actors — that’s you and me — are not seen as rational, but rather human and prone to cognitive biases. This simple observation holds significant implications for the theory and practice of finance, ranging from the reliability of the efficient market hypothesis and the capital asset pricing model to listening to a company presentation at a sell-side conference, speaking with investor relations professionals, building financial models, determining when to buy or sell securities, and even deciding how to optimally organize an investment firm.
So wouldn’t it be nice to know what the good doctor knows? At the recent 65th CFA Institute Annual Conference, Kahneman distilled much of his research findings into bite-sized portions. What follows is a summary of his talk.
Hedge Funds: Important Liquidity Providers and “Small Enough to Fail”
Sebastian Mallaby, author of More Money Than God, spoke to delegates at the 65th CFA Institute Annual Conference about the role of hedge funds in our financial system, making the case that their pursuit and exploitation of mispriced assets makes them critical providers of liquidity to markets and capitalism. Properly aligned incentives, the use of short positions and leverage, and trading flexibility, Mallaby said, are what allow hedge funds to deliver alpha. Posing much less risk to the financial system than “too big to fail” banks, hedge funds are, in contrast, “small enough to fail.”
Recounting the evolution of hedge funds, Mallaby noted that Alfred Winslow Jones created the first “hedged” fund in 1949, using short positions to offset his long positions. Jones also claimed 20% of his fund’s profits, reportedly modeling his compensation after Phoenician merchants, who retained a similar amount of profits from their ventures and distributed the balance to investors. Like Jones, most hedge fund managers today have significant personal stakes in their funds. Having real skin in the game separates hedge fund managers from more traditional asset managers, and Mallaby sees this as an important governor on risk-taking.
tagged: portfolio management
A Three-Step Framework for Analyzing Defined Benefit Pension Plans
David Zion, CFA, managing director and senior analyst at Credit Suisse, was the bearer of yet more bad news about pension plans at the 65th CFA Institute Annual Conference in Chicago. He demonstrated that the aggregate funding status of the S&P 500 defined benefit pension plans has been declining precipitously over the past 15 years and that the funded status of these plans at the end of 2011 was even worse than it was at the end of 2008. In 1991, for example, these plans were 30% overfunded. By the end of last year, however, they were only 79% funded — or underfunded by $355 billion.
Investors therefore shouldn’t waste their time focusing on the pension expense number that companies report on their income statements, because it doesn’t reflect the “true” economic health or financial condition of the company. That’s because pension expense, as shown below, does not reflect the actual amount of cash being contributed into the plan. In addition, the expense includes the amortization of certain items, which reduces the volatility of reported pension expense from period to period. That, in turn, “smooths” reported earnings. Read More
tagged: pensions
10 May 2012
Using Social Network Effects to Enrich Yourself Like Facebook Does
With its widely anticipated initial public offering, Facebook is seeking a market value of as much as $100 billion. If successful, the IPO would yield the company a higher price-to-earnings multiple than virtually every other company in the Standard & Poor’s 500 index. So why such investor enthusiasm for a company with fewer than 2,500 employees worldwide? According to Brian Uzzi, professor of leadership at Northwestern University, the answer comes down to the emerging science of networks. In a session at the 65th CFA Institute Annual Conference in Chicago, Uzzi dissected the network effect: he explained how personal networks can be not only key assets for investment professionals but also a source of collective intelligence about financial markets, which, if properly harnessed, can help money managers make better investment decisions.
Uzzi began his talk by differentiating between two types — one akin to a modern-day Paul Revere, and one more like William Dawes. Revere, of course, was the American patriot who traveled from Boston, Massachusetts, by horseback on April 18, 1775, to alert colonists that the British were coming. His message spread far and wide, and Revere is credited with helping to raise the Continental Army that ultimately defeated British forces. His role in the American Revolution is memorialized in a Henry Longfellow poem titled “Paul Revere’s Ride.”
tagged: Social Networksvolatility
9 May 2012
Day Three Recap: Daniel Kahneman, Pension Finance, Commodity Stocks, and (Social) Network Theory
CFA Institute content director Jason Voss, CFA, provides a few highlights from the third day of the 65th CFA Institute Annual Conference in Chicago.
tagged: behavioral financecommodities
